A utilities subdivision of the State of Louisiana is preparing to issue $1.4 billion in bonds secured by system restoration charges to Entergy Louisiana's existing and future retail electric customers.
The pool of revenue will support system restoration bonds from the forthcoming Louisiana Local Government Environmental Facilities and Community Development Authority, 2023, a transaction slated to come to market and close by the end of March, according to a rating agencies assigning preliminary ratings to the bonds.
J.P.Morgan Securities is the lead underwriter for the deal, known simply as LCDA. It is another deal meant to raise capital to cover infrastructure repairs after several massive storms that have struck the area, including Hurricanes Ida, Laura, Delta, Zeta and Winter Storm Uri, according to Moody's Investors Service.
Recent Louisiana legislation, which was actually finalized on February 14, allows utility authorities to create a financing order that imposes restoration charges on customers and allows the LCDA to issue the system restoration bonds (SRB). Like a lot of other utility finance deals, its stability depends on the supporting legislation going unchallenged, as well as other deal covenants.
LCDA will issue notes through three tranches, all of which are expected to receive triple-A ratings by both Moody's and S&P Global Ratings.
One of the major supports to the timely repayment of the system restoration bonds is a true-up adjustment mechanism, which the financing order makes possible. On a mandatory and semi-annual (at least) basis, the true-up mechanism adjusts the system restoration charges in consumers' electricity bills. The adjustment is uncapped, Moody's notes.
Another strength to the notes is that Entergy Louisiana has a very service territory that covers 58 parishes and includes a large customer base of more than one billion retail electric customers.
S&P did note a number of potential weaknesses, however, starting with the fact that the initial system restoration charge is expected to start at 4% of a 1,000 kilowatt-hour residential customer's total bill. Yet customers would pay 10% of their total bills when the 2023 bond charges are combined with those from the 2014 bonds.
Further, the service area is prone to strong hurricanes that could knock out power to customers suddenly and for long periods. Yet another risk is that S&P noticed a trend of increasing charge-off rates in the past three years, mainly due to a moratorium on disconnections for non-payment amid the onset of the COVID-19 pandemic.
The current bonds have expected final maturities of June 2029 through December 2037 and legal final maturities of June 2031 through December 2039, Moody's and S&P said.
